FY16 revenue will be £53.7m (FY15: £44.8m), in line with ZC estimate of £53.9m, showing growth of c. 20% yoy underpinned by the three acquisitions undertaken in the year. However, due to higher costs relating to the acquisitions and, to a lesser extent, gross margin pressure, PBT will be in the region of £7.0 to £7.2m equating to growth of between 5.5% and 8.0%. As a result, FY16 ZC profit forecast is reduced by 8.0% to £7.0m. The impact in FY18 and FY19 is muted by the announcement of a further acquisition leading to an increase in revenue estimates of 8.7% whilst profit estimates fall c.4.5% in each year, respectively. Despite the decrease in forecasts the PER multiple on FY17 earnings remains single digit at just 9.1x, against a distributor average of 15.8x. With commitment to the forecast dividend increase reiterated, Flowtech Fluidpower plc (LON:FLO) offers an above average yield of 4.1%
Acquisitions drive revenue growth – Flowtech’s strategy since listing has been to consolidate what is a fragmented market to create a specialist fluid power organisation. Including HTL announced today, revenue has increased from c. £35.0m to a forecast £63.0m in FY17 on the back of seven acquisitions. FY16 revenue grew c.20% and is in line with forecasts that were marginally revised in August. The core Flowtechnology business grew revenue by c. 5.5%, albeit with the benefit of currency translation. This is ahead of the market that fell 3.9% in the eleven months to the end of November 2016, according to the Fluid Power Distributors Association (BFPDA).
Forecasts impacted by cost pressure – FY16 forecast gross margin falls 30bps as we factor in the impact from increased currency pressures and the lagged affect of implementing price increases. Additional pressure has been felt at the operating line with margin falling c.140bps yoy and 110bps more than forecast due to central overhead. In the face of difficult end markets, extra cost relating to overhead in the acquired businesses was taken on in an effort not to effect the service offering. That revenue was broadly in line suggests this has worked at the expense of margin. Management remain focused on extracting costs as businesses are integrated more fully at the right time. Underlying forecasts, excluding today’s acquisition, conservatively assume no improvement in gross margin and costs have been rebased at the higher FY16 level.
Valuation – Despite the fall in forecasts Flowtech trades on just 9.1x FY17 earnings despite continuing to offer growth in profitability. This is a 43% discount to the distributor peer group whilst offering a yield of 4.1%, above the sector average of 3.0%
